Why are the target prices on Rolls-Royce shares so high?

Rolls-Royce (LSE:RR) shares have plateaued in recent weeks. Now, the bull run, which started in September, is over.

But it’s worth noting that two investment banks have set share price targets for the tech giant in recent weeks. So why and are they guaranteed?

Target price

A price target is the price at which the analyst believes the stock will be reasonably priced, relative to its performance. When banks raise or lower their price targets, it can have a big impact on stock prices.

Of course, banks raise their targets when they expect stock prices to rise … and lower them when they see downward pressure on stocks.

So let’s look at just two price targets set for this FTSE 100 stock in March.

To begin with, UBS almost doubled its price target to 200p from 105p as it said the stock “abnormally cheap“, although China reopened.

Then Citi raised its price target on Rolls-Royce to 255p as it said “clear route to better cash flow“.

These two price targets are quite substantial when you look at the current share price, 147p, and previous price targets, most of which are below 100p.

In better news, Standard and Poor Raised the rating for Rolls-Royce long-term debt to BB with a positive outlook, which means that the debt can really return to be called investment material over the next 12-18 months.

What’s so great about Rolls?

So is that price target warranted? And what is behind the price target?

Well, Rolls was surprised at the end of February. It has a statutory operating profit of £837m for 2022, up from £513m a year earlier. Meanwhile, revenue rose to £13.5bn from £11.2bn.

For many analysts, this is a turning point.

All parts of the business are now experiencing growth. Defense continued to thrive amid a challenging geopolitical environment and the company recorded impressive growth in orders for power systems, up 29% to £4.3bn.

But most importantly, the civil aviation segment – the company’s biggest revenue generator – is recovering from the pandemic. Large Engine Flight Hours will be around 65% of 2019 levels by the end of 2022. This is a huge increase over 2021.

For 2023, Rolls expects this metric to reach 80-90% of the level of 2019. Most of these additional flight hours can come from China where the body jets with Rolls engines, are used in domestic flights. We may see total profits surpass pre-pandemic levels in 2023.

Of course, there are still some concerns. Debt is down to £3.3bn – smaller than this time last year – but will still drag on profitability.

However, I am still bullish on Rolls. I am confident that the stock can advance and reach its pre-pandemic highs this decade.